Implied Terms and Interpretation in Contract Law
79questions. An alternative explanation is that economic analysis has less to sayabout interpretation methods than it does about other questions in contract law.This article, which will summarize and expand on the literature that does exist,aims to demonstrate that economic analysis has a good deal to say aboutinterpretation questions, but the issues are complex and there are many fruitfulavenues for further research.The argument that there is no real need for a separate economic analysis of interpretation and implied terms stems from the fact that the delineation of thetopic is based on legal rather than economic considerations. In contract law,interpretation usually refers to problems arising from express contract termsthat are reasonably susceptible of more than one meaning. Implied terms arethose that are added to, or place limits on, expressly stated terms. The two areclosely related, yet not identical. For example, if a contract contains a ‘bestefforts’ clause, determining what that clause requires is a question of interpretation; if the contract contains no such clause, courts may have todecide whether to imply a best efforts obligation, and if they do, they have todetermine the content of that obligation. On the other hand, some questions of interpretation do not involve questions of implication, for example, a disputeover the meaning of the word ‘chicken’.In some sense, all contract disputes involve questions of interpretation andimplied terms. For example,
clauses - usually discussed in thecontext of the (implied) impossibility defense - present questions of interpretation, and most contract formation, excuse, and damage rules are‘implied terms’. But contract law has generally used the labels ‘interpretation’and ‘implied terms’ more narrowly, to refer to questions of contractperformance, rather than questions of formation, excuse, defense, or remedy.That is, the legal issue addressed by these doctrines is whether one or moreparties have performed as the contract requires, or have breached. Thus, I willassume for purposes of this discussion that the parties have made anenforceable contract, there are no changed circumstances or ‘mistakes’sufficient to give rise to an excuse claim, the applicable remedies in the eventof breach are accepted, and there are no third-party effects. How do courtsdecide - and how should they decide - what the performance obligations are andwhether the parties have met them?
2. Complete or Incomplete Contracts
Economic analyses of contract law have tended to start with the idealizedconcept of a ‘complete’ contract, though this term has perhaps engenderedmore confusion than clarity. Traditionally, a complete contract has referred toone that provides a complete description of a set of possible contingencies and